Digital firms' importance to UK economy underestimated

Digital businesses are much more important to the state of the economy than
previosuly thought, a study shows.

The Government’s method of categorising businesses is decades out of date, according to the National Institute for Economic and Social Research (NIESR). As a result, at least 100,000 businesses are at risk of being denied credit or paying too much for insurance.

NIESR estimates that there are at least 270,000 – and possibly as many as 471,000 – companies in the digital economy, rather than the 167,000 calculated by the Government. Using new measurements, the digital economy would account for 11pc of the UK workforce, rather than 5pc.

The report uses a real-time database compiled by Growth Intelligence, a market research firm which measures the activity of digital businesses, and highlights the spread of digital businesses across the country.

NIESR says the Government’s official Standard Industrial Classification missed out a large number of companies in business and domestic software, architecture, engineering and scientific and technical consulting.

Some of these high-growth companies are forced to register as simply “Other” within their industries because, when the system was conceived in 1948, it was impossible for statisticians to imagine what might drive growth in the future.

The report also says the revenue reported by digital companies is growing 25pc faster than that of traditional firms and that growth in the digital economy is not simply driven by London. Manchester, Birmingham, Brighton, Reading, Aberdeen, Milton Keynes and Basingstoke all feature highly.

The average digital business employs 23 people, compared with the national average of 20. The report suggests that large numbers of very small companies have skewed the statistics and that the median digital company has higher revenues than average.

Max Nathan, senior research fellow at NIESR, said: “Policymakers have identified the digital economy as one of the UK’s key economic strengths. That means they need to be aware of the true numbers of digital businesses around the country. The old image of tech businesses as start-ups that make no money is out of date, too.”

The independent report was funded by Google, whose chief economist, Hal Varian, says in a foreword: “The UK is one of the world’s strongest internet economies yet the myth persists that it consists largely of tiny dotcom or biotech start-ups in a few high technology clusters that quickly bubble up and often go bust.

“The reality...is that the digital economy has spread into every sector, from architecture firms, whose activities have become almost entirely digital, to machine tool manufacturers.”

Speaking at the report’s launch, Business Secretary Vince Cable said the report adds to the very strong case for the Government to develop a “world class digital infrastructure”.

The Telegraph Investor

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